A. ICO s lending activity in A.2. Loans distributed directly by ICO. C. Operations managed by the State

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2 SUMMARY Letter from the Chairman Legal status and objectives of ICO General Board and executives Activity Report A. ICO s lending activity in 2013 A.1. Lines of financing distributed through second-floor facilities A.2. Loans distributed directly by ICO B. Funding C. Operations managed by the State D. Investments in capital, quasi-capital and guarantee funds E. Investments in companies F. Balance Sheet and Income Statement for the year G. Human Resources Appendices PAG 2

3 LETTER FROM THE CHAIRMAN Nearly six years since the onset of the Great Recession, in 2013 the Spanish economy began a gradual recovery relying partly on progressive improvement of financing conditions and on the strong performance of the export sector, driven by the competitiveness gains of recent years. The dissipation of the perception of a risk of a rupture in the eurozone reversed the dynamics seen in 2012, thus leading the Spanish economy into a virtuous circle. The gradual reduction in financial fragmentation and the State's improving financing conditions are being felt in the real economy in the form of lower interest rates in new loans to SMEs and in better conditions applied by banks. Further, simultaneously with the ongoing improvement in the economic outlook, the demand for credit is increasing, driven by companies' financing needs for fixed capital investments. As a result, the better supply and demand conditions brought about an uptick in the flow of new loans to SMEs in the latter half of the year that is in line with the slowdown in the same period in the contraction of the total financing stock for companies. In addition, the Spanish economy continued its process of international expansion and rotation of its productive structure. The first surplus in 25 years was attained (0.7% of GDP) in the current account balance and external demand continued to make a positive input (1.5pp) to GDP growth. Although Spanish exports of goods and services barely represented 27% of GDP in 2007, they now represent more than 34%, above countries like the UK, Italy, France, the United States or Japan. This strength of the Spanish export sector, in combination with the incipient stabilisation of domestic demand induced by the momentum of investment in capital goods and machinery, allowed the Spanish economy to exit the recession in the third quarter and quickened the pace of quarter on quarter growth (up to +0.2%) in the last three months of the year. In the midst of this change of cycle, ICO kept up an active presence in the Spanish financial system, offering a counter cyclical response to Spanish companies' financing needs as well as helping to revive the flow of credit. This presence in the system resulted in an increase in the weight of ICO loans as part of the total loans at more than 1 year of the entire financial system, amounting to 11.4% in December 2013, the highest in this historical series, up from 10.6% of the previous year. As a result, the weight of the ICO balance sheet as part of the total assets of the system also mildly increased from 3.4% in 2012 to 3.5% in 2013, and the ICO remained the seventh largest bank in Spain in terms of the size of its balance sheet ( 102,203 million). PAG 3

4 ICO activity aims to provide Spanish companies with a framework of adequate financing to enable them to undertake their productive activity. In this regard, last year 190,217 loan operations were formalised amounting to 15,140 million, up 17% on To be able to undertake these operations, ICO raised 11,495 million, of which 73% was raised through medium and long term term issues in capital markets, where ICO remains one of Spain's leading fixed income issuers. The other 27% was raised through bilateral loans both from multilateral bodies (European Investment Bank (EIB), Development Bank of Latin America (CAF) and the Council of Europe Development Bank (CEB)) and foreign institutions that are similar to ICO (Kreditanstalt Für Wiederaufbau (KFW) of Germany). ICO not only managed to increase to 47% (as against 41% of the previous year) the proportion of instruments placed among foreign investors, but also successfully carried out its first issues in foreign currencies (dollars and yens) since % of the new loans granted in 2013 ( 13,884 million) were carried out through so called secondfloor facilities which are articulated with credit institutions and aim to finance investment projects or the liquidity needs of Spanish companies. A second floor facility is a form of co operation that, since its inception more than 20 years ago, has been establishing itself as one of the most efficient systems for the distribution of ICO financing. In this regard, the volume of new second floor loans granted in 2013 was 21% higher than in the previous year. The total activity managed by ICO grew to 156,435 million in 2013, up 19% on This amount includes not only the stock of credit and guarantees in the financial statements at the end of last year ( 74,827 million) but also funds the management of which was transferred to ICO, in its capacity as State Financial Agency, by the Government. Among such funds would be the Fund for the Financing of Payments to Suppliers (FFPP) ( 33,342 million), the Autonomous Region Liquidity Fund (FLA) ( 39,091 million) and various foreign sector support instruments, such as the Development Promotion Fund (FONPRODE), the Corporate Internationalisation Fund (FIEM) the Water and Sanitation Co operation Fund (FCAS) and the Reciprocal Interest Adjustment Contract (CARI). Further, AXIS Participaciones Empresariales, SGECR, ICO's venture capital management subsidiary, launched FOND ICO Global in 2013, a fund of funds with 1,200 million that has the objective of investing in more than 40 private funds and raise 5,000 million over the next four years. The investment selection process of the fund, which made an initial investment of 189 million in six private funds in late 2013, is articulated on the basis of the principles of public tenders: publicity, competition, equality and transparency. It is also important to note that the most important growth experienced in recent years both in terms of both the size of the balance sheet and the activities managed by ICO has not occurred, in any way, at the cost of a deterioration in the main financial ratios. In fact, prudent management of our balance sheet, in line with best market practices has allowed us to improve our solvency ratios (from 14.5% in 2012 to 19.8% in 2013) and efficiency ratios (from 4.7% to 4.5% in the ratio of conversion expenditure PAG 4

5 over ordinary gross income) while we have maintained our NPL rate (5.3%) and coverage of the same (132%) at levels significantly better than those of the Spanish financial system as a whole will be the year of consolidation of the process of gradual recovery that began in the latter half of This change of cycle creates new challenges and opportunities for the Spanish business community, whose internationalisation ICO will continue to support both in the quantity and variety of products and in their quality and adequacy for the needs of our companies. I would like to conclude this letter by expressing my personal thanks to all the employees of ICO for their effort, commitment and dedication to press on with this difficult task, and without whom these results would not have been possible. Román Escolano Chairman of ICO PAG 5

6 LEGAL STATUS AND OBJECTIVES OF ICO Instituto de Crédito Oficial (ICO) is a public corporate entity under the Ministry of Economy and Competitiveness through the Secretary of State for the Economy and Business Support, which has the legal status of a credit institution, and is considered a State Financial Agency, with its own legal status, assets and treasury, as well as having independent management to carry out its activities. ICO's main objectives are to sustain and promote economic activities that contribute to growth and the improved distribution of national wealth, guided by the principle of financial equilibrium. These objectives are accomplished by ICO in its dual role of Specialised Credit Institution and State Financial Agency. As State Financial Agency, by express instruction of the Government, it finances situations of serious economic crisis, natural disasters or similar situations and manages funds for the official support of internationalisation and development. As a Specialised Credit Institution it acts in two ways: through so called second floor facilities, in which ICO finances small and medium sized companies and self employed workers through loans granted by private lenders, which assume the credit risk; directly funding large, public or private productive investment projects by Spanish companies in Spain or abroad, assuming the risk of the operations. ICO is not financed by the State Budgets, but rather in the capital markets, with the Spanish government guarantee on debts and other liabilities incurred by raising funds in these markets. PAG 6

7 GENERAL BOARD AND ORGANISATIONAL CHART (on 31 December 2013) GENERAL BOARD Chairman: ROMÁN ESCOLANO Members: ROSA MARÍA SÁNCHEZ YEBRA Director of the Minister of Economic Affairs and Competitiveness Office Ministry of Economy and Competitiveness CARMEN CÁRDENO Director General of Domestic Trade Ministry of Economy and Competitiveness FELIPE MARTÍNEZ Director of the Minister of Finance and Public Administration s Office Ministry of Finance and Public Administrations JAIME IGLESIAS Director General of Budgets Ministry of Finance and Public Administrations JUAN MIGUEL BÁSCONES Director General of Economic Programming and Budgets Ministry of Public Works MARÍA DEL CORISEO GONZÁLEZ IZQUIERDO CEO Instituto Español de Comercio Exterior (Spanish Institute for Foreign Trade, or ICEX) ADOLFO DÍAZ AMBRONA Technical Secretary General Ministry of Agriculture, Food and Environment JAIME PONCE Assistant Director General of Legislation and Financial Policy Ministry of Economy and Competitiveness PAG 7

8 IGNACIO MEZQUITA Director General for Economic Policy Ministry of Economy and Competitiveness Secretary of the Board: IDOYA ARTEAGABEITIA Secretary of the General Board Assistant Director General of Legal Counsel of ICO ORGANISATIONAL CHART FERNANDO NAVARRETE Chief Financial Officer JOSÉ MARÍA GEFAELL Chief Investment Officer GERARDO GIMENO Chief Risk Officer MARÍA TERESA MOGÍN Chief Human Resources Officer PAG 8

9 ACTIVITY REPORT In 2013, the Spanish economy underwent a gradual and sustained recovery, successfully overcoming especially in the latter part of the year the critical phase it passed through in This performance was mainly due to the easing of financial tensions brought about by the economic measures taken in Europe and Spain, to the contribution of the foreign sector and improving confidence. Although the Spanish financial market benefited from improvements in the eurozone, resulting in a steady decline of the risk premium against Germany, these improvements were not fully passed on to companies. Nevertheless, the pace of the decline in lending to companies began to fall from mid 2013, with a reactivation seen in the final stretch of the year, allowing new operations of less than one million euros to end the year at positive year on year rates for the first time since the onset of the crisis. With this economic and financial environment, Instituto de Crédito Oficial, according to its nature and the functions assigned to it, has continued to maintain an active presence in the Spanish financial system, playing an essential role in channeling credit to companies. In 2013, ICO completed lending operations amounting to 15,140 million. Of this amount, 13,884 million was granted through second floor facilities retailed by the private financial sector, up 21% on the previous year. This financing took the form of more than 190,000 loans, of which nearly 69% were granted to microbusinesses (with fewer than 9 workers) and 52% of operations amounted to less than 25,000, which illustrates ICO's support for the work of the self employed and SMEs, the largest portion of the Spanish productive sector. Also noteworthy this year is the start up of a new catalogue of comprehensive credit lines in support of internationalisation, with the aim of supporting the foreign presence of Spanish companies. The notable increase in this ICO lending activity in recent years has resulted in a greater presence of ICO in the Spanish credit system, offering a counter cyclical response to companies' financing necessities. At the end of the year, the assets on the ICO balance sheet represented 3.5% of the system and the amount of credit with maturity greater than one year granted by ICO not including credit to public authorities accounted for 11.4% of the total at year end, surpassing every month the market share reached in PAG 9

10 For the financing of these operations, in 2013 ICO raised medium and long term funding of 11,495 million. The normalisation of access to financial markets has enabled the ICO to obtain more competitive conditions and once again establish a presence in foreign markets, issue in currencies other than the euro and regain its traditional investor base. Of the above amount, 73% was raised though issues in the capital markets. The other 27%, more than 3,100 million was raised through bilateral agreements with international and multilateral financial institutions (European Investment Bank (EIB), Development Bank of Latin America (CAF), Council of Europe Development Bank (CEB) and Kreditanstalt Für Wiederaufbau (KFW)). They have enabled ICO to undertake long term borrowing in favourable conditions, and to transfer such conditions to the credit operations granted to SMEs by means of a reduction of effective interest rates. In addition to its own credit activity and the granting of guarantees, ICO manages instruments and funds at the instruction of the Government, including the Autonomous Region Liquidity Fund (FLA) and the Fund for the Financing of Payments to Suppliers (FFPP). This activity is carried out on account of the State and is not included in ICO's financial statements. At year end 2013, the outstanding balance of such operations amounted to 81,608 million, which is represents and increase of 53% on year end The aggregate of own operations and those carried out on account of the State presented an outstanding balance at 31 December 2013 of 156,435 million, with a year on year increase of 19%. PAG 10

11 In 2013, also of note are ICO's strategic operations through its wholly owned investee, the venture capital company AXIS Participaciones Empresariales S.G.E.C.R, S.A.U, which launched the first fund of funds of Spanish public capital, with 1,200 million. The purpose of the fund, called FOND ICO Global, is to foster the creation of privately managed venture capital funds to make investments mainly in Spanish companies. FOND ICO Global has a time horizon of 4 years and seeks to acquire holdings in more than 40 private funds, mobilising an approximate total of 5,000 million. In 2013, the ICO's before tax profit was up 20% on the previous year, amounting to 101 million. This profit comes after ICO recognised net provisions and asset write offs of 679 million. This activity has continued while maintaining the main banking business indicators of solvency, efficiency, NPL rate, and hedging at satisfactory levels. PAG 11

12 A. ICO S LENDING ACTIVITY IN 2013 A.1. LINES OF FINANCING DISTRIBUTED THROUGH SECOND-FLOOR FACILITIES Throughout the 2013 financial year, ICO continued to finance the liquidity and investment needs of Spanish small and medium sized companies through second floor facilities. These are lines of finance in which ICO grants funds with the intermediation of credit institutions operating in Spain, and it establishes the main characteristics and financial conditions. For their part, these institutions are responsible for processing, study, and approval of operations and they accept the risk of default. In 2013, ICO moved to unify and simplify existing products and to cover the different financing needs of companies and the self employed, both in Spain and abroad. ICO set up a comprehensive product catalogue to support the internationalisation of Spanish companies by financing both foreign investments and export activity, which are the growth engines of the Spanish economy at present. In 2013, the amount of lending increased by 21% In 2013, ICO granted through these lines 13,884 million, with an upward trend in distributions from the month of April (except in September, for seasonal reasons), and a substantial uptick in the last quarter. In December, 2,696 was disbursed, which is 157% higher than in the same month of the previous year. The final amount disbursed in the year represents an increase of 21% on the year This financing was formalised through 190,168 credit operations, which represents a 17% increase on those formalised in 2012 (162,076). PAG 12

13 From an operational point of view, there are two main areas of activity within these lines: Companies and Entrepreneurs and Internationalisation. Companies and Entrepreneurs. The purpose of lines in these areas of activity is to provide Spanish selfemployed and companies with financing to undertake investments within Spain and cover their liquidity needs. In 2013, 176,251 operations were formalized, with an amount disbursed of 12,208 million, which represents an 8.4% increase on the previous year. Within the activity of Companies and Entrepreneurs, a specific line has been designed to finance projects that are guaranteed by a mutual guarantee company (ICO Mutual Guarantee Company Facility 2013). The amount disbursed in this line totaled 72 million, with an increase of 51.8% on Internationalisation. The purpose of credit lines in this area of activity is to provide Spanish selfemployed and companies with financing to undertake investments within Spain, export activity and cover the liquidity needs arising in such investments. Within internationalisation, 13,898 operations were formalized, for a total amount of 1,675 million. In order to boost export potential, ICO has commercialized the ICO Export Facility 2013, which has the purpose of providing liquidity by means of advances on invoices issued in the export activity of the selfemployed and companies. In 2013, this lending amounted to 1,398 million, with 13,125 export operations formalized with destinations in 144 countries. Through the ICO International Facility 2013, foreign investments have been financed in 82 countries, amounting to 277 million, which represents 20% more volume than in Along with these figures, mention must be made of the start up towards the end of the year of the ICO Mutual Guarantee Company Facility, which is aimed at backing Spanish companies that participate in international tender and bidding processes. PAG 13

14 In addition to these two major second floor facilities (ICO SMEs and Entrepeneurs Facility and ICO International Facility), also in operation are others aimed at mitigating the consequences of natural catastrophes (ICO Natural Disasters, Law 14/2012) or supporting specific sectors: ICO ICAA (Film and Audiovisual Arts Institute), ICO Retail and ICO Fomit (State Fund and Modernization of Tourist Infrastructures). The following table shows details of the volume disbursed in these lines. PAG 14

15 Credit operations are disbursed mainly among the self employed and small enterprises. An analysis of operations by companies staff size shows that 68.5% were given to micro enterprises with between 1 and 9 employees and 91.2% had less than 50. Company size (employees) Loan Amount (millions of euros) %/Total Credit No. of contracts %/Total Transactions 1 to 9 employees (micro SMEs) ,4% ,5% 10 to 49 employees (small business) ,8% ,7% 50 to 249 employees (medium sized company) ,6% ,2% Over 250 employees (rest of companies) ,2% ,6% Total % ,0% 2013 Second-floor loans 2013 by business size (no. of employees) 50 to 249 employees (medium-sized company) 7,2% Over 250 employees (rest of companies) 1,6% 10 to 49 employees (small business) 22,7% 1 to 9 employees (micro SMEs) 68,5% PAG 15

16 51.5% of the credits granted were less than 25,000 and 81.5% were less than 75,000. These indicators show the high degree of capillarity of ICO loans, which are targeted mainly at the self employed and SMEs. Distribution of second-floor facilities by credit volume (euros) 75,000 to 150,000; 10,4% 150,000 to 1,000,000; 7,6% Over 1,000,000; 0,6% 25,000 to 75,000; 30,0% Up to 25,000; 51,5% PAG 16

17 The volume of credit earmarked for foreign investments and export activity has increased. With regard to the geographic destination of second floor loans, in 2013, 87.9% of funds were disbursed to finance liquidity and investment projects in Spain and 12.1% to foreign investments and to support export companies. The volume of second floor loans for financing foreign investments and export activity very significantly increased on the previous year ( 244 million in 2012). This growth reveals the extent of ICO's efforts in 2013 to support the internationalisation of Spanish companies. The following table breaks down the distribution of the investment by destination country. PAG 17

18 Industry and retail are the predominant borrower sectors. Formalised credit shows broad sectorial distribution. Approximately half of loans are provided finance investments or liquidity needs of SMEs and the self employed whose activity is related to industry and retail. A.2. LOANS DISTRIBUTED DIRECTLY BY ICO Most of ICO's lending activity is aimed at small and medium sized companies, to which funding comes through the second floor facility system. Furthermore, the Institute participates in corporate financing and structured financing for large public or private production investment projects. These operations, in which ICO often participates with other financial institutions are analysed directly by the Institute and it assumes the credit risk of the loans granted. In 2013, direct operations were formalised amounting to 1,253 million, of which 803 million were loans or guarantees to finance large investment projects of Spanish companies. By sectors, transport and energy accounted for 42.2% of the total formalised. Geographically, 81.9% of the volume was located in Spain. PAG 18

19 The remaining 450 million was provided to the Fund for Financing of Payments to Suppliers (FFPP). This Fund, which is discussed below, is managed by ICO and main objective is to carry out long term credit operations for the payment of outstanding obligations with suppliers of Spanish territorial authorities. PAG 19

20 B. FUND-RAISING In order to carry out its lending activity, ICO raised medium and long term funding of 11,495 million during the year. 73% of this amount was raised through issues in capital markets and the remaining 27% through bilateral loans from multilateral bodies and foreign institutions that are similar to ICO. ICO is guaranteed by the Spanish State in the debts and other obligations it undertakes to raise funds in the markets. This guarantee is express, irrevocable, unconditional and direct. Most ICO financing in the capital markets in 2013, as usual, came from bond issues in public transactions, private placements and structured placements ( 8,362 million). ICO is the second largest public issuer of debt instruments, after the Treasury. The normalisation of the investor base began in 2013, with a return to the status quo prior to the crisis. 47% of investors were foreigners, particularly residents of Germany (21%) and the UK (7%). This shows that foreign confidence in the acquisition of Spanish assets is recovering. Funding activity Distribution by countries. Italy; 3% Scandinavia; 3% Others; 3% France; 2% Benelux; 4% Switzerland; 4% Spain; 53% UK; 7% germany; 21% PAG 20

21 By investor type, noteworthy are asset managers (49%) and banks (31%). Funding activity Distribution by investor type Insurers and oension funds; 18% Central banks; 2% Banks; 31%; Asset management; 49% By currency, the majority of issues in 2013 were in euros (97%), although an issue of $250 million ( 183 million) was made, as was another of 13 billion yen ( 94 million), the latter targeted mainly at Japanese retail investors. This is ICO's first issue in the Japanese market since June 2011, and it illustrates process of normalising ICO for accessing foreign markets. Along with financing in capital markets, a significant amount was raised through international financial institutions during the year. Specifically, 3,132 billion was formalised in bilateral loans with multilateral bodies (European Investment Bank (EIB), Development Bank of Latin America (CAF), the Council of Europe Development Bank (CEB) and foreign institutions similar to ICO (Kreditanstalt Für Wiederaufbau (KFW)). All such funds, which were raised in advantageous financial conditions, were used to finance SMEs. Notable is the loan signed in November 2013 with the European Investment Bank for 1,000 million, which is the largest loan by that body to an EU financial institution to finance investments by SMEs. PAG 21

22 C. OPERATIONS MANAGED BY THE STATE ICO, acting as a financial agent, manages certain operations for the State, as instructed by the Government. Regarding these instruments, ICO arranges and manages its operations and performs all the related financial tasks. The total amount of funds managed by ICO amounted to 81,608 million at year end 2013, up 53% on year end These operations are implemented separately from the rest of its operations and are booked independently of the Institute's accounts. AUTONOMOUS REGION LIQUIDITY FUND (FLA) Under Royal Decree Law 21/2012, on liquidity measures for the Public Administrations, the Autonomous Region Liquidity Fund (FLA) was created as a mechanism to support the liquidity of the Autonomous Regions, in a temporary and voluntary way, which allows them to meet their financial needs In August 2012, the Government instructed ICO to manage the Fund and to formalise the related loans to be signed with the Autonomous Regions. The total amount authorised for the FLA in 2013 was 23,000 million, with 22,453 executed. Of this amount, ICO paid 357,106 invoices directly to suppliers and creditors of Autonomous Region authorities coming to 6,523 million. In total, from the FLA's creation to the end of 2013, ICO has paid 560,426 invoices, amounting to 13,276 million. The outstanding balance of the Fund amounted to 39,091 million at 31 December PAG 22

23 FUND FOR THE FINANCING OF PAYMENTS TO SUPPLIERS (FFPP) Royal Decree Law 4/2012, of 24 February, created the Fund for the Financing of Payments to Suppliers, as a public law entity with legal personality and full legal capacity and appointed ICO as paying agent in charge of the administration and management of its operations. In May 2012 the Fund entered into a syndicated loan of 30 billion involving 26 financial institutions, with ICO the main participant of the same, providing 23.3% of the total. For the implementation of this payment mechanism, ICO was commissioned to design, manage and implement the structure that has allowed the invoices to be paid in a very short period of time and the relevant loan agreements to be signed with the Local Authorities and Autonomous Regions. Charged to the FFPP, payments were made in 2012 amounting to 27,372 million through the payment of 5.5 million invoices for works and services provided by suppliers, the majority of them SMEs and the self employed, to Autonomous Regions and Local Authorities. In 2013, payments amounted to 6,509 million, representing some 0.5 million invoices. From the first payments in May 2012 until year end 2013, 33,881 million was injected into the Spanish economy, through 9,169 transactions and the payment of more than 6 million invoices. At 31 December 2013, the outstanding balance of the Fund amounted to 33,342 million, with an increase of 23% on the previous year. CORPORATE INTERNATIONALISATION FUND (FIEM) The FIEM is a fund without its own legal personality managed by the Ministry of Economy and Competitiveness, through the Secretary of State for Commerce that was created in 2011 (under Law 11/2010, of 28 June, to reform the system of financial support for the internationalisation of Spanish companies). The objective of the fund is to promote the internationalisation of Spanish companies by assisting them in entering new markets or positioning them in key markets for Spanish trade policy and granting these companies the financing they cannot find in financial markets. IC acts as Financial Agent, formalising, in the name and representation of the Spanish Government, and on behalf of the State, the relevant credit arrangements, loans, or donations. The Institute also provides services of technical support, accounting, cash management, paying agency, control and, generally, all such financial services relating to operations authorised on account of the FIEM. PAG 23

24 During the year, this instrument has gained in complexity through the broadening of the range of products that may be eligible for financing: project finance, corporate operations, purchase credit in commercial conditions and even capital contributions to funds. In 2013, 57 operations were formalised on account of FIEM, amounting to 288 million. The outstanding balance of the credit portfolio at 31 December 2013 was 5,115 million. RECIPROCAL INTEREST ADJUSTMENT CONTRACT (CARI) The CARI system aims to encourage the participation of lenders in long term financing of Spanish exports. One of the conditions necessary for use of the system is that the interest rates set for the operations by lending institutions are those listed in the Consensus of the Organisation for Economic Cooperation and Development (OECD). The interest adjustment contracts assure lenders receipt of a certain net interest on the outstanding balance of each loan received into the system, eliminating the risks arising from the difference between the fixed rate of the loan and the cost conventionally attributed to the resources that it finances. When the difference is negative, the State, through ICO, pays these lenders the amount of said difference. When the result is positive, it is the lenders that must deposit the calculated differences with ICO. Over 2013, 13 CARI operations have been signed worth 24 million. The main export destination countries, by volume formalised, were as follows: Mexico (accounting for 86%), Honduras (12%) and Brazil (2%). The outstanding balance of the CARI portfolio, to 31 December 2013 came to 2,703 billion. Of the total portfolio, 69% corresponds to operations signed in dollars and 31% in euros. PAG 24

25 DEVELOPMENT PROMOTION FUND (FONPRODE) The Development Promotion Fund was set up in 2011 under Law 36/2010 of 22 October, as an instrument of Spanish development co operation, managed by the Ministry of Foreign Affairs and Cooperation, through the Secretary of State for International Cooperation and the Spanish Agency for International Development Cooperation. The Development Promotion Fund Office, as part of the aforementioned Agency, is responsible for administration. ICO acts as financial agent of the fund and is responsible for formalising, in the name and representation of the Spanish Government, and on account of the State, the corresponding agreements with beneficiaries indicated in Royal Decree 845/2011 of 17 June 2011 Regulating the FONPRODE. The Institute also provides financial services for Fund actions. The Fund is aimed at eradicating poverty, reducing inequalities and social inequities between individuals and communities, gender equality, protection of human rights and the promotion of sustainable human development in poor countries. The aid provided by the Development Promotion Fund is intended for: Non financial multilateral development agencies. States and the state public sector (Regional, provincial and local public administrations) in developing countries. Microfinance management institutions. International development financial institutions. Companies carrying out technical assistance, feasibility studies, as well as ex ante and ex post appraisal programs. At 31 December 2013, the outstanding balance of FONPRODE amounted to 812 million. PAG 25

26 WATER AND SANITATION CO OPERATION FUND (FCAS) The Water and Sanitation Co operation Fund (FCAS) was created under the sixty first additional provision of Law 51/2007, of 26 December, on the General State Budget for 2008, with the aim of facilitating access to water and sanitation as one of the essential elements for human welfare and development, included in the Millennium Development Goals signed in 2000 The fund is currently managed by the Ministry of Foreign Affairs and Cooperation, through the Directorate of Sectorial and Multilateral Cooperation of the AECID and its purpose is to award aid and, where appropriate, untied loans aimed at financing projects in the areas of water and sanitation, under a co financing framework with the national authorities in the partner countries of Spanish Co operation. ICO is the financial agent, responsible for formalising in the name and representation of the Spanish Government, and on account of the State, the corresponding agreements to be signed with beneficiaries and to provide financial services related to Fund actions. In 2013, no new contributions were made. The balance of contributions granted since the Fund was created to 31 December 2012 was 546 million. PAG 26

27 D.INVESTMENTS IN CAPITAL, QUASI-CAPITAL AND GUARANTEE FUNDS In 2013, ICO continued to promote the various funds in which it invests, some managed through its 100% holding, AXIS Participaciones Empresariales S.G.E.C.R., S.A.U. from the Institute or other institutions or companies. AXIS is a venture capital firm focused on minority investments in growth capital for the amount of 1.5 to 15 million to support companies in their growth. In 2013, Axis launched FOND ICO Global and continued to manage the other existing funds: FOND ICOpyme, which directly invests in capital and quasi capital companies; and FOND ICOinfraestructuras, with the mission of financing infrastructures. Although AXIS manages these funds, they are owned by ICO. AXIS has been operating in the venture capital market for over 25 years and throughout its history it has made investments in over 150 companies for a total of over 350 million. FOND ICO Global This is the first fund of funds comprising Spanish public capital, provisioned with 1,200 million. It addresses one of the main requests of the venture capital sector, which demanded greater involvement of the public sector in forms of alternative non bank financing for companies, and it is part of the Economic Stimulus and Entrepreneur Support Plan approved by the Government in February The objective of the fund is to support the creation of privately managed venture capital funds that make investments mainly in Spanish companies in every phase of their development. FOND ICO Global has a time horizon of 4 years and seeks to acquire holdings in more than 40 private funds, mobilising an approximate total of 5,000 million. The Fund will invest in projects that combine innovation and entrepreneurship by investing in companies either in their start up phase, or in a state of greater maturity. Indirectly, the Fund seeks to promote, above all, job creation, attract international investors and boost the internationalisation of Spanish companies. The first public tender, amounting to 189 million, was carried out in December 2013, with six venture capital funds selected pursuant to an investment commitment of 685 million. Of these, three are venture capital funds, and the other three capital expansion funds. The selection process was based on the principles of a public tender: publicity, competition, equality and transparency. PAG 27

28 FOND ICOpyme, FCR The Venture Capital Fund FOND ICOpyme was created with provisions of 250 million and maturity in It is a general purpose fund, its objective focusing both on companies that, having reached a certain degree of maturity, want to finance their expansion and/or growth, and companies in early stages that, having survived the initial stages, need resources to continue their development. In both cases the investment is made, preferably, in joint ventures with other financial, technological or industrial partners. Among others, FOND ICOpyme is involved in internationalisation projects or those with a strong innovative component, regardless of the sector to which they belong. Also, seeking greater capillarity in the early stages of projects, FOND ICOpyme invests in other funds, mostly private and with a certain degree of specialisation. Currently it has investments in 29 companies and holdings in a further 20 venture capital firms, amounting to 128 million. Additionally, in order to cover the even earlier phases associated with entrepreneurship, in 2013, FOND ICOpyme together with the FEI and NEOTEC initiative launched the Fondo Isabel La Católica European Angels Fund to support the investment of Business Angels with provisions of an initial amount of 30 million. PAG 28

29 FOND ICOinfraestructuras, FCR This fund has provisions of 500 million, maturing in It is a fund that invests primarily in greenfield sustainable transport, energy and environment projects initially in Spain. Within the current framework of public budget constraint, the objective of FOND ICOinfraestructuras is to contribute to the development, construction and co management of infrastructure projects focusing on Public Private Partnership schemes. In this sense, among the FOND ICOinfraestructuras's objectives is that of strengthening the capitalisation of projects accompanying minority interests in capital or quasi capital in infrastructure management companies FOND ICOinfraestructuras acts in a stable horizon of long term investment commitment and low market parameters in terms of the required profitability (time/profitability). The fund has four investees in the sectors of wind energy, railway infrastructure, motorways and hospital infrastructure. JEREMIE ICO manages JEREMIE (Joint European Resources for Micro to Medium Enterprises Fund), created in December This Fund comes under the FEDER operating programme, an initiative promoted by the European Commission in order to facilitate the use of the structural funds to fund RD&I activities carried out by companies. The initial provisions of the Fund were 70 million, 47 million of which were contributed by the European Union through the Technology Fund, the remainder coming from ICO. With a duration until 31 December 2015, the Fund is mainly designed to establish a credit line guarantee for offering bank endorsements to companies that carry out RD&I projects qualifying for aid from the CDTI (Centre for Industrial Technological Development) within the framework of the Technology Fund. Thanks to this guarantee line they can offer advances to beneficiary companies so they can get access to up to 75% of funding right from the start of the project. In 2013, 203 projects were formalised, amounting to 57 million. As of December 2013, since the beginning of the activity of the fund, 679 projects have been formalised, amounting to 219 million. PAG 29

30 OTHER CAPITAL FUNDS ICO also invests, with different contributions, in the following capital funds: Fons Mediterrània, FCR, Venture Capital Fund for the implementation of investment operations in Morocco, Tunisia, and Algeria. FC2E, Carbon Fund for Spanish Companies, promoted by Instituto de Crédito Oficial and Santander Investment. It is the first joint venture managed carbon fund in Spain. It was created to assist Spanish companies in achieving compliance with regulations on greenhouse gas emissions. Fondo de Carbono Postkyoto, was created in 2008 by five European public financial institutions: the European Investment Bank, la Caisse des Dépôts, Instituto de Crédito Oficial, KFW Bankengruppe and the Nordic Investment Bank. It aims to buy and sell carbon credits generated from 2013 for environmental projects. Marguerite Fund, a European capital fund, with the objective of backing investments in infrastructures that contribute to the fight against climate change, energy security and Trans European Transport Networks. PAG 30

31 E. INVESTMENTS IN COMPANIES Instituto de Crédito Oficial is involved in the shareholding of the companies listed below. It holds all of the capital of AXIS Participaciones Empresariales S.G.E.C.R, S.A.U. manager of venture capital funds incorporated in In Compañía Española de Reafianzamiento, S.A (CERSA) it has a 24.15% capital holding. CERSA is a state corporation under the Ministry of Industry, Tourism and Commerce through the Directorate General of Policy of Small and Medium sized Companies, whose activity is based on refinancing or partial coverage of risk assumed by the Mutual Guarantee Societies with small and medium sized companies that require additional guarantees to solve their financial problems, prioritising the financing of investments and innovative projects, as well as microbusinesses and new or recently created companies. ICO owns 20.31% of the share capital of Compañía Española de Financiación al Desarrollo, S.A (COFIDES), a state corporation set up in Its purpose is to provide medium and long term financing for viable private investment projects abroad where there is a Spanish interest of some kind, in order to assist, on the basis of profitability criteria, in both in the development of the countries receiving investments as well as the internationalisation of the economy and of the Spanish companies. The ICO holding in EFC2E Gestión, S.L totals 50% of the capital This organisation is engaged in the management of the assets of the Carbon Fund for Spanish Companies (FC2E). PAG 31

32 F. BALANCE SHEET AND INCOME STATEMENT FOR THE YEAR The ICO Balance Sheet has virtually quadrupled since At 31 December 2013, ICO assets account for 3.5% of the Spanish financial system overall, as it continues to be the seventh largest Spanish credit institution by assets. During the year, the size of the balance sheet was down on 2012, mainly due to the repayment of credit lines to securitisation funds (non recurring activity of ICO). Public Balance Sheet millions ofeuros and percentages 31/12/13 31/12/12 Annual variation absolute as % Cash and Balance with central banks (266) (93,7) Trading portfolio (154) (27,7) Available for sale financial assets ,0 Loans and receivables (13.036) (14,3) Held to maturity investment portfolio ,3 Hedging derivatives (1.510) (50,0) Non current assets held for sale 1 (1) (100,0) Investments (3) (6,4) Tangible and intangible assets (2) (1,9) Other Assets (179) (40,3) TOTAL (13.027) (11,3) Own Funds ,1 Valuation adjustments (54) 70 (124) (177,1) Equity ,9 Trading portfolio (155) (28,0) Financial liabilities at amortised cost (12.914) (11,8) Hedging derivatives ,7 Provisions (20) (6,6) Other Liabilities (281) (90,1) PAG 32

33 In 2013, the non performing loans rate was 5.3%, far below the sector average of 13.6%. Furthermore, ICO maintains a prudent coverage and write off policy. The final coverage ratio was 132%, far above the industry average (58.0%). PAG 33

34 Meanwhile, as was the case in 2012, ICO continued to maintain its portfolio of financial assets during 2013, in order to achieve a comfortable liquidity position and minimise risks that may arise from volatility in the capital markets. ICO's borrowed funds at year end 2013 amounted to 96,669 million, where bond issues account for 67% of this amount. The Institutes own funds at 31 December 2013 amounted to 4,520 million, with a year on year increase of 11.1%, and they are of the highest quality (capital and reserves it has generated itself). It has not issued any hybrid debt instruments (preferred shares or subordinated debt). In 2013, ICO's capital increased by 380 million, up to 3,610 million at year end. The Institute's solvency ratio increased in 2013, to 19.8%, which is well above regulatory minimums. PAG 34

35 Net Interest Income earned by ICO in 2013 rose to million, down 4.3% one the previous year. Nevertheless, the strong performance of fees and of earnings from financial transactions yielded a Gross Margin of million, 2% higher than in the previous year. During 2013, operating expense was down 2% over the previous year, continuing the cost containment policy initiated in previous years. This, together with the increase in Ordinary Gross Income, generated an efficiency ratio of 4.5% at year end. PAG 35

36 The before provision profit amounted to million, which allowed ICO to make net provisions and asset write offs of million, which is in line with those carried out in the previous year, and achieve a high rate of coverage as noted above. The before tax profit amounted to 101 million, representing an increase of 20.2% on G. HUMAN RESOURCES Instituto de Crédito Oficial, as a financial institution with the legal form of Public Corporate Entity, must be prepared to permanently adapt to the evolution of the financial sector, marked by increased PAG 36

37 competition, unification of markets and new technological challenges. Simultaneously, and in its role as State Financial Agency, the Institute must be able to address with a total guarantee of success the challenges that are demanded by the various social agents. Thus, human capital is the most important factor that ICO relies on for effectively performing its functions. PERSONNEL INFORMATION At 31 December 2013, the staff of the Institute consisted of a total of 310 employees. The distribution of employees by professional groups is reflected in the following table: Workforce distribution by professional groups (no. of employees at 31 December) Variation Executives Middle management Technical Experts Clerical staff TOTALES The level of professionalism of ICO employees is very high: excluding managers, 76.8 %% of the staff is in the professional expert category. PAG 37

38 The average age of the workforce is % of the employees are in the range of 36 to 50 years old. Women account for 61% of the workforce and 51% of the middle and senior management positions. TRAINING PAG 38

39 ICO has maintained its commitment to education and training as a key tool for improving the skills, abilities and development capabilities of its workforce. This training strategy is aligned with ICO s overall objectives, focusing on supporting the internationalisation, specialisation and solvency of ICO as a financial institution and facilitating improvements in its management as State Financial Agency. The Training Plan approved by the Institute for rests on the following foundations: Language training with a view to preparing the workforce for future challenges that ICO must assume in supporting Spanish companies in the internationalisation process. As a result, the number of hours employed in language training increased by 34.7% compared to 2012 and the percentage of staff receiving language training reached 71% (62% in 2012). Introduction of a new training area, general interest talks, which have been highly successful among the staff. 292 attendees were recorded. Boost in skills training, which saw a large increase in the number of hours (121%) on % of the ICO workforce received training in 2013, with an average of 70 hours per person (49 hours in 2012). In 2013, there was an 85% increase in the number of attendees in training courses (1,235 attendees, as against 668 in 2012). The number of hours provided increased by 55% on MANAGEMENT BY OBJECTIVES SYSTEM PAG 39

40 The Management by Objectives (MBO) system was introduced in 2007 with the aim of establishing a system for defining, implementing and monitoring the Institute's objectives. The system's development continued in 2013, allowing for measuring each employee's contribution to attaining objectives and rewarding their work through a previously established variable remuneration system. APPENDICES PAG 40

41 PAG 41

42 ASSETS SUMMARY Balance at 31 December Total 1= 2a a 10 Cash 2 Loans to Credit Entities 3 Second-floor loans 4 Créditos a clientes 5 Securities Portfolios Total 6 of which shares and holdings 7 Tangible Assets 8 Other Assets 9 millions of euros Accrual Accounts PAG 42